Why Efficient Reforms Fail: Endogenous Game Transformation under Status Quo Bias and Social Preferences

Abstract

Why do societies remain stuck in inferior institutions even when superior al ternatives are widely recognized? This paper develops a model in which agents choose not only actions within a game but also transformations of the game it self. Transformations may be soft, changing payoffs through taxes or subsidies, or hard, changing feasibility through deletion or replacement of actions. Within a coordination model with status-quo bias (switching cost) and boundedly rational play (logit quantal response), we show that these interventions are qualitatively different: finite taxes shift behavior continuously but cannot eliminate residual use of the inherited action, whereas deletion bypasses inertia by removing the action from the feasible set. We further characterize how antagonistic social preferences at the meta level can block reforms that are individually beneficial for every player. The framework provides a formal rationale for why hard feasibility restrictions of ten dominate soft price incentives under inertia, with direct applications to climate transition (carbon tax vs. fossil-fuel phase-out) and platform regulation (fines vs. deletion of addictive features).